Macquarie shows Wall St rivals a mirror image

The author is a Reuters Breakingviews columnists. The opinions expressed are his own.

Attention, Wall Street investment banks. One of your rivals has just reported a 49 percent jump in full-year earnings, fuelled by unfashionable businesses like trading commodities and asset finance. It earns a double-digit return on equity with lower-than-average leverage. Oh, and its shares are up 50 percent in the past twelve months.

For beleaguered securities firms, Macquarie’s results must seem like an inverted version of reality. The Australian group has shrugged off criticism of its business model during the crisis to emerge stronger. Its base in one of the world’s few remaining triple-A rated countries probably helps. So does the weakness in the Australian dollar, which added 7 percent to revenue in the year to March 14 by boosting the value of its overseas income.

Yet Macquarie is also doing well in areas where others have struggled. Asset management remains the bank’s largest business, defying predictions that its model of setting up and managing infrastructure funds would unravel when the credit boom ended. Its asset finance business, which leases cars and aircraft, also reported a 19 percent increase in pre-tax profit.

The real outlier, however, was Macquarie’s fixed income, currencies and commodities (FICC) arm. Most investment banks are struggling in this area as trading volumes shrink and new regulations squeeze returns. Some are getting out of the business of trading metals and energy entirely. Yet Macquarie’s commodities revenue – which accounts for two-thirds of the FICC division – jumped 58 percent year-on-year.

So far, investors have given Macquarie the thumbs up. The bank’s shares have outperformed rivals and now trade on more than 1.5 times book value for the current financial year, according to forecasts compiled by Eikon.

Macquarie has long been proud of its willingness to pursue a different business model. Yet the bank is becoming increasingly international: it generated more of its revenue in the Americas in the last financial year than it did at home. As it continues to expand, it will face the same pressures as its rivals, or attract greater competition. That will make it harder for Macquarie to buck the trend.